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Thursday Value Overview

Down, up, down, and up again. That’s the market this week with another frenetic move today. Some people are calling this the Trump Bottom because of his call to buy Bank of America (BAC), Citigroup (C), Caterpillar (CAT), Intel (INTC), Johnson & Johnson (JNJ), and Procter & Gamble (PG). Actually, Trump is calling it that. Buffett speaks to Fortune Magazine, Wally Weitz picks up Wells Fargo (WFC), Mosaic (MOS), CineMedia (NCMI), CNA Financial (CNA),and Kenneth Cole Productions (KCP), and James O’Shaugnessy reminds us of some contrarian truths.

Donald Trump made a surprising announcement on CNBC this morning. The real estate mogul was buying stocks! In a move that some are calling the Trump Bottom, he self-promoter said he bought Bank of America, Citigroup, Caterpillar, Intel, Johnson & Johnson and Procter & Gamble. "I love these companies. I've watched them for years and I've never owned stock in them," he said. "I went out yesterday and said, 'Look, I'm not getting interest on CDs...so I went out and bought some stock."

That’s exactly what Ben Bernanke wants people to do. By flattening the yield curve and trying to encourage more borrowing, the goal is to move people to riskier assets. On Wednesday the S&P 500 dividend yield was higher than the 10 year treasury yield. If that’s the case, it seems to me that holding the 10 year is more risky than owning the S&P 500. Certainly you can grab 10 stocks out of the index with high payouts and safe share prices and businesses that will do very well over the past ten years. Again, that’s what the Fed wants you to do, and you’ve got at least two years where they won’t get in front of you.

Fortune Magazine has a Warren Buffett interview today. It appears that all of this talk about recessions over the past few weeks haven’t touched Berkshire businesses. Not only that, but Buffett has been buying stocks recently. That shouldn’t come as a surprise. Going back to my point above, Buffett is taking advantage by issuing Berkshire bonds at record low rates, S&P downgrade be damned.

Staying in Omaha, Wallace Weitz had some Q2 buys to take a look at. Wells Fargo, Mosaic, CineMedia, CNA Financial, and Kenneth Cole Productions are highlighted in a GuruFocus article. These were his five largest buys and represent a fairly wide cross-range of industries. The common characteristic is that they are generating excess cash and are at least moderately undervalued. Weitz isn’t worried about the short term, as usual.

Finally, here’s a good article that showed up on my Twitter feed. It’s an overview from The Guru Investor about a James O’Shaugnessy piece: The Market is Not The Economy. The point is that the economy can’t predict how the markets will do in the short term. If anything, there may be an opposite correlation, meaning when the economy is at its worst, it’s the best time to buy stocks. My favorite quote from it, “After periods when GDP growth is negative, the S&P 500 has averaged 21.36% returns over the next year; 12.24% annualized returns over the next three years; and 12.10% annualized returns over the next five years.”

Disclosure: Long BAC, CAT, BRK.B

About the author:

Steven Kiel
Steven Kiel is the president and chief investment officer for Arquitos Capital Management, a Virginia-based investment management firm. He is a graduate of George Mason School of Law and a captain in the Army Reserves. He manages two spoke funds, The Freedom Fund, a value-oriented portfolio, and The Hayek Fund, a portfolio dedicated to free market principles. He can be contacted at steven.kiel@arquitos.com or through the firm's website at www.arquitos.com.

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